Collaboration on Standards: Where Are We Now?

Like most initiatives collaboration on open standards and harmonisation was driven by the corporate community and primarily a section of the community from within the Rosettanet¹ industry group (see also Mark Sutton’s articles Collaboration on Standards: An Opportunity for Banks to Move Up the Value Chain?). They created a new PMP (payment milestone program) with the following mandate:

• Produce a global commercial payment framework.
• Facilitate the auto clearing of accounts receivable line items (invoices).
• Improve the flow of remittance information for faster cash application.

The PMP embraced contributions from other major stakeholders, such as banks and vendors. The initial common goal was to develop a single payment standard that could be used globally by any corporate, irrespective of size and sector, and by any servicing bank regardless of location. What challenges did this collaboration on standards seek to address?

If we consider the bigger picture first, it is clear that the corporate community face a number of challenges in the cash management space. The diagram below provides a high level overview of what will be a familiar picture to a large number of corporates.

The complexity of the above landscape creates difficulties in achieving standard workflow control, introduces manual dependencies and hampers the big picture, resulting in an ineffective cash management position. From a cash management perspective, establishing open standards can facilitate improvements in operational efficiencies, achievement of STP (straight through processing), and the optimisation of corporate cash. The following diagram explains how this is achieved.

The introduction of this new XML based payment initiation message, combined with the associated advices and bank statement, address one of the three core components of the client to bank interface (the other two being the underlying file security and the communications interface). As the banking community, or certainly the major players, have already agreed to support this new standard, this effectively addresses the multibanking challenge. In simple terms, the corporate now has the required portability and is no longer locked into a bank through proprietary standards.

The underlying message structure has been designed to enable the corporate community to maximise their STP rates by clearly defining what information is required to facilitate automated processing. The XML message definition also provides the required data consistency around the debit advice and financial statements. Finally, there is a commitment from the banking community to support the provision of a unique 18 character URI, where the underlying clearing systems have the required capabilities to pass this through. The changes described above provide the opportunity to automate the reconciliation process through the receipt of the unique reference indicator and to introduce standard workflow control.

Collectively, these changes will enable the corporate community to achieve operational efficiencies through the elimination of the manual reconciliation process, which typically can take between 3-5 days to apply funds. According to the study undertaken by Killen & Associates, the issues surrounding seller reconciliation costs a $1bn company $27m annually. While the design sounds logical, what is the reality bearing in mind this work has been progressing since 2004?

Current Developments

Since the start of this journey in 2004, the collaborative effort has continued to grow, with more banks joining the corporate STP bank group, increasing interest from the various corporate industry groups, increasing vendor participation and increasing regional activity. The initial vision around achieving a global harmonised XML standard in the cash management arena is starting to become a reality. The first positive step was the agreement to adopt the XML payment kernel by the following standards bodies: IFX, OAGi, SWIFT and TWIST.

The next move was to formalise the standard through the ISO20022 process. In September 2005, the new C2B ‘XML’ Payment Initiation message became the first officially registered ISO20022 message. This approach now provides the required disciplines around the ongoing maintenance, storage and communication of this important standard.

On a regional scale, the Nordic community is currently working on the existing XML definition with a view to seeking a number of enhancements that will drive adoption within the region. Furthermore, the Danish government has recently implemented the new C2B ‘XML’ Payment Initiation message. While in Europe, the European Payments Council is now also considering adoption of the new C2B ‘XML’ Payment Initiation standard. APACS, the UK’s payment council, has also started a review of the new message standard from a UK banking perspective.

SAP has announced its plans to support the new C2B ‘XML’ Payment Initiation message in 2006. With Oracle also committed to supporting it, this is clearly a step in the right direction as far as achieving a global standard is concerned.

While work continues on finalising the XML direct debit and financial statement, it is clear that these new messages will continue to evolve on the back of increased global adoption. It now appears that the underlying process is in place with the resilience to support the continued growth of this harmonised message, which will ultimately become a global standard.

Challenge: Rate of Adoption

It is clear that momentum is continuing to gain pace. The real metric for success, however, is the rate of adoption. It is common knowledge that one of the key challenges for the corporate community around adoption relates to the ROI and specifically building the business case to support the investment. It has been pleasing to note the rate of adoption within the Rosettanet community and the figures from one of the original sponsors, Intel, highlight some of the benefits that they have achieved since adopting this new standard.

From a corporate perspective, the mandate to improve shareholder value through a combination of reducing costs and increasing income streams to ultimately improve profitability remains a core objective. Based on the information to date, this initiative can deliver.

From a banking perspective, the cash management landscape is now changing and it is no longer an option to ‘lock in’ corporate clients through proprietary standards. Differentiation will be key and will be achieved through a combination of country coverage, value added integrated solutions, service and price. The race has already started in adapting to the new landscape with a view to broadening and deepening existing relationships and attracting new ones.

¹ The Rosettanet organisation is a self-funded, non-profit 520 member consortium dedicated to creating and implementing open and industry wide e-business process standards in information technology, electronic components and semiconductor manufacturing. This program is aimed at reducing processing costs through automating accounts receivable reconciliation and improving the flow of payment information to facilitate the efficient and timely use of available funds.